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Hedge Fund Goliaths' Feud Spotlights Multi-Level Marketing Business Opportunity Debate
29 Jan 13 Posted by: Kathleen C Lanza
in Featured Articles
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Some are calling it the “Greatest Moment in Financial TV History.” Call it whatever you want, we’ll call it anything but boring. Last Friday’s very public CNBC fracas between two of the most powerful hedge-fund giants on Wall Street, William Ackman and Carl Icahn, has everybody talking—about everything from the personal and professional dynamics that precipitated the nasty exchange (and there are plenty) to the question of whether or not even taking such public and evocative positions is good for the market…and everything in between.

At the heart of it all is an assertion made back on December 20 by the first major player in this ongoing financial soap opera, billionaire hedge fund manager and CEO of Pershing Square Capital Management, Bill Ackman. On that day at a Sohn Investment Conference in New York, Ackman detailed his concerns about one of the most successful multi-level marketing companies in recent memory, setting off a firestorm of sorts.

Since then, it’s been interesting to say the least. And once again, the whole concept of multi-level marketing (MLM) (aka network marketing), what it is and what it is not is in the national spotlight, which isn’t necessarily a bad thing.

Unless, of course, you’re the company in question. And that company is Herbalife.

Ackman contends Herbalife is “the best-managed pyramid scheme in the history of the world,” one that he predicts will collapse in due time and whose stock is worth nothing. As a result, Ackman’s company is shorting more than 20 million shares of the company, more or less betting $1 billion that the stock will fall.

Not surprisingly, Herbalife’s retort to that claim was fairly immediate. The gist? The company completely denies it is an illegal pyramid scheme of any kind and calls Ackman’s assertion a “malicious attack on Herbalife’s business model based largely on outdated, distorted and inaccurate information.” Like many other MLM (multi-level marketing) companies, Herbalife’s products are sold through a vast network of independent distributors, who are able to earn compensation not only from selling product but for recruiting other distributors as well. The company pushed back further by stating it “operates with the highest ethical and quality standards” and that its board is constantly “reviewing our business practices and products,” as well as hiring “independent, outside experts to ensure (our) operations are in full compliance with laws and regulations.”

Shortly thereafter, Daniel Loeb, yet a third hedge-fund billionaire bigwig, weighed in on Herbalife’s side saying in a letter to his investors, “The pyramid scheme is a serious accusation that we have studied closely with our advisors. We do not believe it has merit. (Ackman’s) thesis rests on the notion that the FTC (Federal Trade Commission) has been asleep at the switch, missed massive fraud for over three decades, and will shortly awaken (at the behest of hedge fund short seller) to shut down the Company. We find this thesis to be preposterous, particularly since the FTC has been sensitive to frauds of this kind. Since 1997, the FTC has brought 13 separate cases against alleged pyramid schemes.”

Loeb, whose own bad blood with Ackman goes back to a soured 2008 investment deal, announced on January 9 that his Third Point fund has taken an 8.24 percent stake in Herbalife, constituting a roughly $270 million bet against Ackman’s stance. Comparatively civil and primarily focused on their professional differences when it comes to issues such as valuation and the company’s business model, the back and forth between Ackman and Loeb has been ongoing. It’s only recently when Icahn entered the picture that the mudslinging really began and things started to get ugly.

Given that the extremely contentious nature of Ackman and Icahn’s relationship is no secret to anyone on Wall Street and that it started a decade ago, some are speculating that Icahn’s attack on Ackman’s public position on Herbalife is as much personal as it is professional. However, Icahn says that is simply untrue, adding that his personal dislike for the man is not enough for him to go in and buy stock just to get back at him. Furthermore, he asserts that Ackman’s Herbalife short and his public attack on the company constitutes nothing more than a calculated ploy to scare people and ultimately boost his own returns, nothing more. And as for Ackman’s public commitment to donate all potential proceeds from his gamble to charity? Icahn’s take on that promise is pretty clear: “He talks about charity. That’s complete bull@*#+!” he said.

Sticking to his guns as the interview wound down, Ackman predicted that if Loeb (or anyone else) “stays long Herbalife, he will lose his entire investment.” Pundits point out that in order for Herbalife to go under, especially given its anticipated better-than-expected 4th quarter returns, it will likely take significant action on the part of government. And while the Securities and Exchange Commission (SEC) has opened an investigation into the company, most believe it won’t amount to much given that it never has before.

We want to hear from you, our readers! What do you think about the Ackman-Icahn feud? Who will prevail?

To watch Friday’s big dustup for yourself, click here on Two Titans of Wall Street Go at It now!

For more information on how to find a great MLM or network marketing business opportunity or distributorship that is right for you, these prior articles on BusinessOpportunity.com are here to help:

Understanding MLM/Network Marketing

Legitimate MLM/Network Marketing Is Serious Business

And to learn more about the Herbalife debate overall, we recommend these articles:

Blow for blow from BusinessInsider.com:

Ackman and Icahn Just Brawled

Ackman Fires Back

Icahn Shreds Ackman

Ackman Responds to Herbalife Presentation

From Bloomberg:

Icahn Has No Respect for Ackman

From the Wall Street Journal re: Herbalife’s anticipated 4th Quarter results:

Herbalife 4th Quarter Results Should Be Higher than Anticipated

From Reuters:

Rumble in the Wall Street Jungle

From Forbes:

Loeb and Herbalife Take on Ackman

Herbalife’s initial response to Ackman’s assertions:

Herbalife Statement

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